Is Target Corporation (TGT)’s Lack of Diversification Actually A Positive?

Target is coming off a great first quarter of 2015 in which it generated adjusted EPS of $1.10, which was above its expectation for EPS of between $0.95 and $1.05 for the quarter. In light of exceeding its own expectations, Target raised the low end of its EPS guidance for the 2015 fiscal year to a range of $4.50 to $4.65 from a previous range of $4.45 to $4.65. In addition to higher EPS, the company’s comparable store sales increased by 2.3% and digital channel sales by 37.8%. Following its sound first quarter results, Target announced an increase of 7.7% in its dividend. The company has been a reliable dividend payer as it has raised its dividend for 28 consecutive years. The company also expanded its share buyback program, doubling it from $5 billion to $10 billion.

Hedge funds are likely attracted to the solid results reported by Target in its latest quarter, the growth in its comparable sales, and ironically its lack of diversification. Moreover, the funds are also likely enticed to invest in Target due to the company’s shareholder-friendly policies, evidenced by its reliable, growing dividend and the expansion of its share buyback program. The company also just announced a deal to sell its pharmacy and clinic business to CVS Health Corp (NYSE:CVS) for $1.9 billion and to have CVS operate the pharmacies within its stores. The money fetched from the deal could be used to return further capital to shareholders, grow the number of stores, and/or invest in projects in its current stores to benefit the company’s shareholders in the future. Given the positive results and bullish hedge fund sentiment, we rate Target’s shares a buy even in light of them currently trading at their 52-week high and expect a continued growth phase for the stock.

Disclosure: None